For real estate investors, fixing and flipping property is an attractive way to diversify their portfolio and make a relatively fast profit off a property.
There are certainly various advantages to fixing and flipping, as there are pitfalls to also be wary of, especially as a first-time flipper. In this piece, we’re going to explore how to maximize tax benefits and what mistakes to avoid that might cost you more money.
Calculating your gains
More of a guideline than an actual rule, the “70% Rule” in real estate provides investors with a framework for how to calculate the spending cap for an investment property. Overpaying for a property, in addition to repair costs, will only lead to thinner margins, therefore knowing what to offer can make or break your gains down the road. The “70% Rule” suggests that an investor should pay no more than 70% of the after repair value (ARV), minus the repair costs. This calculation factors in wiggle room for any other miscellaneous expenses that will inevitably pop up during the renovation process.
Of course, part of applying such a framework stems from a clear understanding of the market and property value, which comes with experience. Calculating an accurate ARV and repair costs will result in a larger margin and reduce the possibility of losing money.
Is 70% the end all, be all number? No, but the idea is to do the math on any property and come up with a calculation that suits your current budget while still delivering on your long-term flipping goals.
Tips for fix-and-flip taxes
Maximize deductions — Most soft costs, that is, those associated with renovation expenses from labor to materials, are often the obvious items that are tax deductible. However, if you are a full-time investor who is flipping and selling multiple properties in any given year, you are classified as a business, and that in turn opens more doors for what can be considered soft costs. Things like deducting part of your rent or mortgage for your home office, utility bills, and any home supply purchases can all be factored as tax deductible for the purpose of running your business.
Do repairs before the end of the year — If hiring a contractor to do repairs on the property, have the work finalized before the end of the year to ensure that the tax deduction is factored in. Things like fixing heating and air conditioning units, fences, or pipes can be tax-deductible costs for flippers. They are also much quicker, short-term projects that can be easily finished with little to no lag time.
Hire a professional — Tackling taxes for real estate investments is no small feat. Rather than leaving it to DIY software, consult with an accountant or tax advisor about your unique situation. Additionally, don’t wait until tax season is in full swing to get things in order. Gather, organize, and store all the appropriate documents so that when the time comes, the process is as seamless as possible.
What pitfalls to avoid when flipping
Real estate investing, like any other business, requires time, money, and effort. No one launches a business without a vision or goals in mind and flipping houses shouldn’t be approached any differently. While flipping is an excellent way to grow a portfolio, become well-versed in the real estate industry, and yes, make money, it’s still not a guarantee of getting rich.
Before jumping all in, it’s important to have your financial ducks in a row. Do your research on the different financing options available to you and which ones make the most sense for your long-term and short-term goals. While one financing option is great for a soon-to-be-landlord, it might not be ideal for a fix-and-flip investor. Knowing the pros and cons of each option is critical for starting off on the right foot.
As an investor, time management and ensuring that the project stays on track is of the utmost importance. That means not only factoring in your own timeline—which can fluctuate based on your circumstances, i.e. are you employed or is this investment your full-time job? —but that of anyone you outsource work to. Contractors, real estate agents, tax advisors, and inspectors will all most likely be pulled in at some point in the flipping process. And don’t forget the length of time it can take to sell the property.For those considering quitting their jobs to focus solely on flipping projects, having a set timeline, budget, and strategy is critical to ensuring you don’t hit hard financial times before the job is done.
Without risk, there is no reward. Knowing your options, the market, the community, and understanding the pros and cons of flipping properties is the only way to put 100% of your work into your next venture.
And make sure you have the right partner when it comes to financing as well. Contact Temple View to learn why our Fix and Flip products are trusted by experienced investors around the country.